Page last updated at 12:49 GMT, Wednesday, 18 March 2009

FSA ponders mortgage restrictions

Lord Turner
Lord Turner will consult on limiting the size of mortgages

Restrictions on the initial size of mortgages may be introduced by the Financial Services Authority (FSA).

Lord Turner's review of banking regulation says there is case for limiting the size of home loans to protect people from borrowing too much.

It might also protect banks from the dangers of excessive lending.

But Lord Turner said there were some potential disadvantages to any such restrictions, and so the FSA will consult on the issue this autumn.

"The rapid extension of mortgage credit was a key factor in the origins of the financial crisis in the US, the UK and several other countries," his review said.

Both some customers and some providers relied imprudently on the assumption that ever rising house prices would reduce the risks
Lord Turner

"In the UK high initial LTV (loan-to-value) and LTI (loan-to-income) ratios played an important role," it added.

The Council of Mortgage Lenders (CML) welcomed the consultation.

"We see the FSA's September paper on the future of mortgage regulation as a real opportunity to help shape a future regulatory landscape that will serve both lenders and consumers better," said Michael Coogan of the CML.

Imprudent assumptions

If the FSA does decide to formally limit the size of mortgages it would involve a fundamental change to its past policy.

Until now the authorities have believed that regulation should focus on the health of financial institutions and ensuring they treat their customers properly, allowing both sides to make their own choices.


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However, the belief that "market discipline" would lead to banks and individuals avoiding excessive risk has been shattered by the banking crisis of the past year and a half.

"Both some customers and some providers relied imprudently on the assumption that ever rising house prices would reduce the risks otherwise inherent in high LTVs," the Turner review said.

The FSA's consultation paper, to be published in September, will look at various methods of regulating mortgages, including formal limits on either the LTV or LTI ratios.

As well as protecting lenders and borrowers, limits on the mortgage market could also stop rising house prices exaggerating wider economic booms and busts.


Lord Turner pointed out that some other countries, such as Hong Kong, the Netherlands, Greece, Austria and Poland have formal restrictions on the size of home loans.

However, he also said there were some serious potential disadvantages to such a policy.

Some people would be kept out of the property market because they would not be able to raise enough money for a larger deposit, thus preventing them from buying a house.

And other borrowers might simply get round the restrictions by borrowing the extra money elsewhere, and at greater expense, for instance by using a credit card.

This was echoed by the Royal Institution of Chartered Surveyors (Rics).

"Restrictions on mortgage lending run the risk of stifling activity in the housing market and could cause more problems than they solve," it said.

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